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Ex-JPMorgan Workers, Tax Borders, Swipe Fees: Compliance

Aug. 15 (Bloomberg) -- Two former JPMorgan Chase & Co. employees were charged by U.S. prosecutors with attempting to conceal trading losses at the largest U.S. bank last year as part of a probe of its $6.2 billion loss on derivatives bets.

Javier Martin-Artajo, a former executive who oversaw the trading strategy at the bank’s chief investment office in London, and Julien Grout, a trader who worked for him, were charged with conspiracy, wire fraud and making false filings in complaints unsealed yesterday in Manhattan federal court. The two men engaged in a scheme to falsify securities filings between March 2012 and May 2012, according to the government.

Bruno Iksil, the Frenchman at the center of the case who became known as the “London whale” because his portfolio was so large, signed a non-prosecution agreement with the U.S. in June, the government said yesterday. He pledged to cooperate with prosecutors as part of the deal.

Martin-Artajo was Iksil’s supervisor while Grout assisted him in valuing his trading book. JPMorgan ousted all three last year and sought to recoup some of their pay.

JPMorgan Chief Executive Officer Jamie Dimon characterized the $6.2 billion loss as “the stupidest and most-embarrassing situation I have ever been a part of.” First disclosed in May 2012, the bad bets led to an earnings restatement, a U.S. Senate subcommittee hearing and probes by the Securities and Exchange Commission and U.K. Financial Conduct Authority.

Dimon, 57, pushed out senior executives including former Chief Investment Officer Ina Drew, who oversaw the London unit where the loss took place. The bank said it clawed back more than $100 million in pay from employees who were involved with, or oversaw, the trade.

Martin-Artajo, 49, and Grout, 35, are charged with four counts, including conspiracy to falsify books and records, commit wire fraud and falsify securities filings; falsifying books and records; wire fraud; and making false filings to the SEC.

They face as long as 20 years in prison if convicted on the most serious counts.

Joe Evangelisti, a spokesman for the bank in New York, declined to comment.

Prosecutors in the office of U.S. Attorney Preet Bharara in Manhattan said Martin-Artajo and Grout manipulated and inflated the value of the position marks in the Synthetic Credit Portfolio, or SCP, which the government said had been very profitable for the bank’s chief investment office, or CIO.

Attorneys for Martin-Artajo and Iksil declined to comment on the charges. Grout’s lawyers didn’t respond to a request for comment.

The SEC has filed a parallel civil suit in Manhattan federal court seeking disgorgement of ill-gotten gains and unspecified financial penalties. In the civil suit, U.S. regulators signaled they will hold JPMorgan accountable for violating securities laws when it disclosed inaccurate information to investors because of allegedly deceitful accounting by traders in London.

The references to the bank were contained in a lawsuit

Neither Martin-Artajo nor Grout is in the U.S.

Edward Little, a partner at Hughes Hubbard & Reed LLP in New York who represents Grout, said in an Aug. 12 interview that his client was living in France and isn’t a fugitive.

Martin-Artajo was on vacation, and had received no communication telling him he shouldn’t travel, his attorneys at Norton Rose Fulbright LLP in London said in an Aug. 13 statement.

Unless the defendants surrender to authorities, the U.S. will probably have to seek extradition. U.S. prosecutors urged Martin-Artajo and Grout to surrender. Martin-Artajo, a Spanish citizen, and Grout, a French citizen, should “do the right thing,” Manhattan U.S. Attorney Preet Bharara said at a press conference yesterday.

The cases are U.S. v, Grout, 13-MAG-01976, and U.S. v. Martin-Artajo, 13-MAG-01975, U.S. District Court for the Southern District of New York (Manhattan).

For more, click here, and click here.

Compliance Policy

Company Profits Without Borders Spurs Government Scrutiny

Policy makers around the world are stepping up efforts to tighten rules because a growing slice of corporate profits isn’t taxed in any country.

Multinational companies can legally structure transactions so they don’t pay tax anywhere, creating “stateless income” that is coming under attack as countries seek to fill budget gaps. The Obama administration, Organization for Economic Cooperation and Development and tax officials from other countries want to reach a consensus on how to combat the issue, with more than a dozen proposals being weighed, Bloomberg BNA reported.

The heightened scrutiny offers a chance to take action. The largest U.S.-based companies expanded their untaxed offshore stockpiles by $183 billion last year, or 14 percent, according to data compiled by Bloomberg. In the U.S., Senator Carl Levin held hearings taking U.S. technology companies to task for structures that let them pay little or no tax on billions in profits. Representative Dave Camp is leading a tax rewrite that he says will fix the system. Camp has signaled potential support for a 15 percent tax on intangibles as one way to limit base erosion, one of three options he has suggested in a discussion draft of a new tax system.

Stateless income is one driver behind a plan to stop profit shifting unveiled in July by the OECD, which calls on countries to take action in more than a dozen areas over the next two years. Treasury Secretary Jacob Lew hailed the plan. Leaders of the wealthiest economies, the Group of Eight nations, have agreed to tackle tax evasion by multinational companies anew.

The OECD plans to look at rules requiring taxpayers to disclose aggressive tax planning arrangements. The plan calls for scrutiny of facets of the digital economy that may be vulnerable to tax manipulation and a variety of changes to transfer pricing guidelines and a focus on “harmful tax practices.”

Compliance Action

JPMorgan Said to Expect Multiple Fines as Whale Traders Charged

JPMorgan Chase & Co. expects to be fined by authorities in the U.S. and U.K. over last year’s $6.2 billion trading loss, which led to criminal charges against two former employees, said a person familiar with the matter.

The Securities and Exchange Commission signaled in a complaint filed yesterday against Javier Martin-Artajo, 49, and Julien Grout, 35, that the New York-based bank will be held accountable for providing inaccurate information to investors after the two men “fraudulently” mismarked their trades to conceal losses.

“JPMorgan failed to furnish to the commission, in accordance with the rules and regulations prescribed by the commission, such financial reports as the commission has prescribed,” the SEC wrote in its complaint.

SEC spokesman John Nester didn’t return a call seeking comment.

The bank also expects to be fined by the Department of Justice, the Commodity Futures Trading Commission and the U.K.’s Financial Conduct Authority, said the person, who asked not to be named because the discussions are private.

The bank, which doesn’t disclose how much it has set aside for legal expenses, said in a filing last week that it could face as much as $6.8 billion in legal losses beyond the reserve. The company’s second-quarter litigation expense more than doubled to $678 million from a year earlier.

Litigation costs could total $3.8 billion in the second half of this year, estimates Charles Peabody, an analyst with Portales Partners in New York.

JPMorgan violated securities rules that require companies to report accurate financial statements, among other infractions, the SEC said in its suit against the former traders. U.S. prosecutors charged Martin-Artajo and Grout, who worked with Iksil in JPMorgan’s chief investment office in London, with conspiracy, wire fraud, making false filings and falsifying books and records.

Their “scheme” caused the bank to release inaccurate earnings information to investors in April and May 2012, the SEC said in its suit. In July 2012, JPMorgan restated first-quarter results after an internal investigation revealed that values on the derivatives portfolio weren’t consistent with accounting rules. Attorneys for Martin-Artajo and Grout declined to comment.

When asked at a news conference yesterday about what penalties or accusations JPMorgan could face, Manhattan U.S. Attorney Preet Bharara declined to comment. Dennis Holden, a CFTC spokesman, said he couldn’t immediately comment.

Alpine Ex-Managers Investigated on Alleged Bankruptcy Fraud

Former managers of Alpine Bau GmbH, the builder that in June filed for Austria’s biggest postwar insolvency, are being investigated on allegations of false accounting and bankruptcy fraud, prosecutors said.

Authorities are probing five executives from several Alpine units, Erich Mayer, a spokesman for the white-collar crime department at Vienna’s prosecutors office, said by phone yesterday. The investigation follows a complaint by lawyer Eric Breiteneder, who represents holders of Alpine bonds, he said.

Alpine Bau, owned by Spain’s Fomento de Construcciones y Contratas SA, filed for insolvency on June 19 with liabilities of 2.56 billion euros ($3.4 billion). Lawyers are looking at ways to reduce the damage done to the holders of bonds issued by Alpine Holding GmbH, Alpine Bau’s parent that also filed for insolvency. The notes have a combined face value of 290 million euros.

If proven guilty, the people investigated face as long as 10 years in jail, Mayer said. He declined to identify the individuals being probed.

FCC, based in Madrid, declined to comment on the probe.

SEC Confronts Filing Backlog as Investors Await Berkshire Report

The U.S. Securities and Exchange Commission said it’s working to post a backlog of corporate filings on a day when investors await quarterly reports on holdings by investment firms including Berkshire Hathaway Inc.

The SEC’s system for receiving documents from companies “remained up and running and able to accept filings throughout the day, in Washington, said

John Nester, an SEC spokesman said yesterday that the SEC’s system remained ‘‘up and running’’ and able to accept filings throughout the day, ‘‘but dissemination of the filings stopped at 3:43 p.m.’’ The dissemination service was restored the backlog was being processed, he said yesterday, without elaborating on what caused the delay.

Institutional money managers overseeing $100 million or more of equities listed on U.S. exchanges must file a Form 13F within 45 days of the end of a quarter. The forms list the number of shares held in each company and the market value of the stake on the period’s final trading day. Managers also are required to include information on some convertible debt securities and exchange-traded options.

Yesterday was the deadline for second-quarter filings. While the SEC released 13Fs from firms including Daniel Loeb’s Third Point LLC and George Soros’s Soros Fund Management LLC minutes before 6 p.m. in New York, the report by Omaha, Nebraska-based Berkshire, led by Warren Buffett, wasn’t posted as of 8 p.m. last night.

Europe Banks Shape Up Five Years After Lehman as ECB Taking Over

Europe’s biggest banks are stepping up efforts to boost capital and trim assets as pressure from regulators and investors increases, half a decade after the global financial crisis began.

Deutsche Bank AG, Germany’s biggest banks, plans to shrink its balance sheet after turning to shareholders for funds in April, while Barclays Plc, Britain’s No. 2 bank, will sell shares to increase capital and cut assets. France’s BNP Paribas SA and Germany’s Commerzbank AG for the first time published figures on equity as a share of total assets, after regulators focused attention on the measure.

While the Federal Reserve forced the biggest U.S. banks to clean up their balance sheets eight months after the September 2008 collapse of Lehman Brothers Holdings Inc., European regulators tolerated lower capital levels to keep loans flowing during the sovereign-debt crisis.

U.S. commercial bank assets shrank by 10 percent in 2009 and 2010, while euro-area assets have fallen only 5 percent from peak levels, according to an Ernst & Young LLP report in July.

One reason European banks are showing greater zeal in fortifying their balance sheets is the prospect of tougher oversight from the European Central Bank, which takes charge of euro-area banking supervision next year. The ECB will start reviewing the assets of the biggest lenders in coming months, a process that may accelerate capital raisings as European banks still need to trim balance sheets by as much as 1.5 trillion euros ($2 trillion), Ernst & Young estimated.

For more, click here.

Tribal Online Lenders Ask Banks to Resist Regulatory Pressure

An association of online lenders operated by Native American tribes called on banks to resist pressure from New York State to cut them off from the nation’s primary payment system.

The Native American Financial Services Association said the state’s regulators are violating the tribes’ sovereign immunity when they ask banks to prevent them from making and collecting on short-term, high-cost loans via the Internet, according to a letter written by Barry Brandon, the group’s executive director, to more than 100 banks.

The banks include Capital One Financial Corp., Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., PNC Financial Services Group and U.S. Bancorp.

Benjamin Lawsky, the New York superintendent of financial services, on Aug. 6 ordered a group of 35 online lenders, including at least four tribal companies, to cease offering loans in New York. He also sent a letter to 117 banks requesting their assistance to ‘‘choke off” the lenders from the automated clearing house system, the bank-supported network that handles electronic bank account debits.

The doctrine of tribal sovereign immunity limits state interference in Native American governments’ actions. Brandon said tribal lending operations are legal, and that New York is “doing an end-run” around the doctrine by pressuring banks and third-party payment processors to sever ties with the tribes.

Brandon also wrote that tribes are considering “the next legal steps” to take regarding the New York actions.

The Department of Justice and the Federal Deposit Insurance Corp. have been pressuring banks to reconsider their relationships with online lenders.

Courts

Fed Given Week by Judge to Respond on New Swipe-Fee Rules

The U.S. Federal Reserve was given a week to tell a federal judge its position on immediately rewriting regulations setting debit-card swipe fees in the wake of a court finding the current rule unlawful.

U.S. District Judge Richard Leon in Washington yesterday ordered Fed General Counsel Scott Alvarez to appear in his courtroom on Aug. 21 after a lawyer for the Fed said it hadn’t made any decisions on how to replace the current rule, or whether to appeal the judge’s ruling.

Earlier in the hearing, Leon laid out a timeline that would put a final interim rule in place by the end of the month. An interim final rule takes effect immediately before any public comments are accepted.

Yesterday’s hearing comes two weeks after retailers battling banks over debit-card transaction costs were handed a victory by Leon in Washington, who said merchants were overcharged billions of dollars under an unlawful swipe fee set by the Fed.

The decision, unless overturned on appeal, will force regulators to revisit rules that bankers said would cost them 45 percent of their swipe-fee revenue.

The case is NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia (Washington).

Comings and Goings

Yellen Beats Summers as Likely Fed Chairman in Economist Poll

Federal Reserve Vice Chairman Janet Yellen is the most qualified and most likely candidate to run the central bank, according to the majority of private economists in a Bloomberg News survey that showed Lawrence Summers trailing by wide margins in both categories.

Sixty-five percent said Yellen probably will be President Barack Obama’s selection to replace Chairman Ben S. Bernanke, while 53 percent said she would do the best job, according to an Aug. 9-13 poll of 63 economists. Twenty-five percent said Summers, Obama’s former top economic adviser, would be the nominee, while 10 percent said he would be best. Six percent said former Fed Vice Chairman Donald Kohn is most likely choice.

The survey results contrast with odds offered by bookmaker Paddy Power Plc, which show Summers is the favorite. Economists are focusing more on leadership continuity than on the political connections underpinning Summers’s chances, according to Mark Calabria, an economist and the director of financial regulation studies at the Cato Institute in Washington.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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